Trading commodities - Online guide and brokers

Trading commodities

Commodity trading requires skill but can be profitable when mastered. The variety of financial products and instruments that can be used to invest in commodities makes it a versatile market that's suitable for a wide range of traders.

This beginner's guide explains what commodity trading is about, along with investment tips and sample strategies. We also provide a list of the best brokers for commodity trading.

Types of commodities

The history of commodity trading dates back to ancient times, before the advent of stocks and bonds. The definition of a commodity, whether it's crude oil, gold or wood, is a raw material or agricultural product that can be bought and sold on the market.

There are four main categories of commodities: metals, energy, livestock and agricultural products.

Metallic commodities include precious metals, such as gold and silver, and industrial metals, such as iron ore and tin. Energy products include crude oil, petrol, heating oil and natural gas. Livestock includes pork bellies and live cattle, while agricultural products include both corn and soybeans.

Commodities can also be differentiated as "hard" or "soft." Hard commodities are those that must be mined or extracted, such as gold and oil, while soft ones include agricultural or livestock products. Let's take a closer look at some of the most popular commodities on the market:

Crude oil

When it comes to commodity trading, crude oil is the most popular one in the world, with a large volume (millions of barrels) traded every day. The two main crude oil benchmarks are US West Texas Intermediate (WTI) crude oil and Brent crude oil, although there are actually many other types of oils. The price of each one depends on the degree to which that crude oil is aligned with a particular benchmark.

WTI crude oil is the main benchmark for the U.S. oil market, while Brent crude oil comes from the North Sea oil fields. Brent crude oil futures can be traded on ICE Futures Europe, which offers trading for a variety of commodities.

Natural gas

Natural gas is a commodity used to heat buildings and cook food, among other things. Natural gas futures traded on the Chicago Mercantile Exchange Group are the benchmark for this commodity. The price of natural gas is affected by supply and demand factors, many of which are similar to those that influence the price of crude oil. These include global demand related to economic production, as well as the rise of alternative forms of fuel.

Soybeans

The US dominates the market for soybeans, which is a commodity that can be traded on the Chicago Mercantile Exchange. The price of soybeans is generally correlated with that of corn and wheat, and the supply and demand factors that influence its price are common to other agricultural products and include weather conditions.

Gold

Gold offers many trading opportunities. Like other commodities, it can be traded using a variety of financial instruments, including futures, options, and ETFs, and many people invest in it to profit from price shifts. However, some precious metals, including gold, are traditionally associated with a certain degree of stability, and therefore gold is often used as a hedge against instability and inflation.

How does commodity trading work?

Commodities are usually traded on the stock markets through financial instruments and company shares, for example through a trading platform. This is done in markets around the world, including the US (like New York City, San Francisco or Chicago), UAE, Malaysia, Pakistan, India (NSE or MCX), Canada, Australia, Hong Kong, UK, Kenya, Nigeria, South Africa, Singapore, New Zealand, Philippines, the Netherlands, etc.

In Switzerland, commodity trading is mainly concentrated in Geneva, Zug and Lugano. The Zug Commodity Association (a branch of VTB Commodities Trading DAC), helps regulate the commodity supply chain.

In the US, commodity trading is controlled by an assigned NAICS code.

The impact of commodity trading on jobs and the economy

Commodity trading takes on several forms. People interested in the commodities industry can take professional trader training, which allows them to invest using other people's money. In addition, trading allows individual traders to invest their own money through a broker.

Professional commodity trading is the source of many jobs, be it entry-level jobs, an internship program, or even an experienced commodity trading advisor or analyst position. These possibilities are offered by investment firms and banks such as J.P. Morgan, which has a strong presence in London. In the US, you can visit the Zippia recruiting site to see a job description and how to answer general interview questions. Many of those jobs, whether it's with JP Morgan, Morgan Stanley or Goldman Sachs, come with a high salary. A degree or other qualifications may be required for some of these investment banks and commodity trading companies, for example for those who work on trading floors.

The future of the commodities industry

As the global economy recovered from the Covid virus which had a big impact in 2020, investors started shifting their money into commodities. Indeed, commodity-linked hedge funds performed well in the next year.

Other companies in the industry include DXT Commodities, which acts as a brokerage firm in the commodities market, YMAX Commodities Trading LLC (a well-established Dubai firm), Commodities Trading SRO (involved in commodity trading operations in wholesale markets), HDFC Securities, Commodities Trading Ltd, Macquarie Commodities Trading US LLC and Atlantis Commodities Trading (UK) Ltd. However, the oil trading ZenRock Commodities Trading Pte Ltd company was one of many to experience financial difficulties.

In the agrifood market, blockchain technology is used to improve the efficiency of physical commodity trading. The use of blockchain technology in other areas of the commodities market could have a transformational impact on business in the industry. Some commodities like lithium cannot be speculated directly in the market, although water has recently been added as a tradable commodity.

How can I trade commodities?

Understanding how to invest in commodities is essential in deciding whether commodities (as opposed to stocks or currencies) are right for you. The good news is that your options are not severely limited when it comes to trading commodities. But understanding how it works can be tricky. So what does it mean to "invest in a commodity"? Let's take a look at some of the commodities market financial products and instruments (such as CFDs and futures) that you can use.

Futures contracts

Futures contracts are an easy way to trade commodities. In short, futures contracts are an agreement to sell or buy a particular asset at a predetermined price on a particular date. They help provide price certainty to companies and financial institutions involved in the commodities sector, and have been used as a hedging strategy and as a tool to speculate on the price shifts of a particular commodity.

Futures contracts can be settled either by the actual delivery of the raw material (for example, 100 barrels of oil) or by a cash settlement which consists of paying the difference between the price agreed in the contract and the market price. end of contract (as a speculator or trader for a day, this is how you will settle the contract).

For example, let's say the futures contract calls for a price of $71 per barrel of oil in a month. The current market price is $66 and you buy the futures contract because you think the price is going to exceed $71. If so, you make a profit (less any brokerage fees). If not, you suffer a loss.

Options contracts

With an option contract, traders have the right (but NOT the obligation) to buy the asset/settlement at the end of the contract. Therefore, continuing with the example above, if you believe that the price of a barrel of oil is going to exceed $71 but it doesn't, your loss would be limited to the price of the option contract rather than the price difference between that indicated in the contract and the price at the end of the contract.

Exchange traded funds (ETF)

ETFs (or exchange traded funds) are gaining in popularity, including those related to commodities. Part of their popularity is that they are easy to buy and sell (more so than mutual funds), and also make it easy to diversify portfolios and spread risk.

An ETF tracks the price of a set of assets (for example, a group of commodities or a set of soybean trading companies). Traders can buy shares of the ETF to gain exposure to changes in the price of the underlying assets of the ETF. The trader doesn't own the assets, but the financial institution that creates the ETF.

Be aware that you will likely have to pay a management fee, in addition to the usual brokerage fees, to buy an ETF. However, this cost must be weighed against the advantage of portfolio diversification and an investment strategy led by professionals.

There are also ETNs (exchange-traded notes) which are similar to a bond (without interest) and which, at maturity, give rise to the exchange of an amount corresponding to the change in the price of the asset.

Mutual funds

Mutual funds shaer common features with ETFs, in that a mutual fund is a collection of assets and traders can buy units of the mutual fund. However, buying and selling shares of a mutual fund is not as easy as that of an ETF. Mutual fund shares can only be traded once per trading day, while ETFs can be bought and sold anytime.

CFD's (contracts for difference)

CFDs (contracts for difference) are a popular instrument which many brokers have decided to highlight in their product offering. Used regularly in commodity trading, they give traders the ability to speculate on the price movement of an asset (up or down) without actually owning the underlying asset.

They are also a leveraged financial instrument. Leverage means that depending on the required margin, you can invest a lower proportion of your capital compared to the actual value of the commodity you're trading. For example, if the required margin is 5%, it means that an investment of £15 in a particular commodity will actually result in £300 of exposure. So it can increase both profits and losses.

Spot market

One of the main reasons a speculator enters the spot market (which basically means buying at the current market price for immediate delivery) is to close a position in the futures market. For example, if the value of oil exceeded the value of an oil futures contract at the time the contract was closed, the trader effectively made a profit, as he can become the owner of the oil and sell it immediately on the spot market for a higher amount.

Other ways to invest

People interested in commodity trading can also invest in managed futures which, like ETFs and mutual funds, are a collection of assets, but here focus on futures rather than on other securities or derivatives. Keep in mind, however, that actively managed portfolios like these are subject to fees.

Then there are the commodity pools which are similar to both ETFs and mutual funds, except that they are private and investors must be licensed before buying a share.

For those who want indirect exposure to commodities, you can invest in a company whose stock price correlates with the price of a particular commodity. For example, the stock price of oil companies such as British Petroleum is closely related to the price of crude oil itself.

Tips for those who want to trade commodities

Risk management

Commodities are notoriously volatile and if you can, you should use order types such as "Stop Loss" and "Trailing Loss" orders as part of your risk management.

A stop loss order automatically closes your position when the price reaches a certain level. So, if the price of a commodity were to suddenly rise due to an unexpected event, this safeguard would reduce your losses.

You can also use trailing loss orders, which allow you to indicate a value (expressed in pips) at which you wish to close your position. The advantage of this method is that if the price of the asset initially increases, the "trailing loss" will also move up, thus helping to secure profits in a way that the "stop loss" order does not. If the price were to then reverse and suddenly fall, the "Trailing Stop" would kick in and reduce your losses.

Stay in the loop

This is especially important for you if you want to incorporate fundamental analysis into your commodity trading strategy. However, no matter what trading strategy you use, it is key that you make sure that you know the supply/demand factors that influence the price of a commodity. Whether it's an extreme weather event, geopolitical instability, or slowing economic growth, you need to be able to react to these events and changing data by adapting your commodity trading strategy.

Also make sure that you strive to improve your commodity trading skills. There are many documents available online, as well as educational materials available on brokers' websites.

Traders can also subscribe to trading newsletters or magazines, listen to podcasts, buy books (e.g. Commodities For Dummies, Commodities Trading for Beginners or Ken Roberts' book on the topic), or even take an online training course that provides insight into commodity trading. Udemy and Trading 101, among others, also offer training courses to learn how to trade CFDs and stocks. Quizlet even offers flashcards on the CFTC (Commodity Futures Trading Commission).

There are also many discussions about commodity trading on forums such as Reddit, Quora, and WSO (Wall Street Oasis). YouTube has plenty of videos that help traders invest in commodities (and explain various concepts in simple terms), and Trader Wiki is also a source for information on commodity trading. An academic study/research paper has also been produced on investing in commodities and is available online.

Compared to the past, there is really no excuse today when it comes to finding suitable training resources for commodity trading without spending too much time doing so.

Choosing the best way to invest

Given the broad range of financial products and instruments available when it comes to commodity trading, it can be easy to feel overwhelmed or be tempted to choose an investment method at random.

Choosing the right instrument or financial product to invest in is key when investing in commodities. This choice varies from one trader to another and depends on your level of experience, your tolerance for risk, and whether you actually want to own the asset or just speculate on its price movement.

For example, CFDs are leveraged financial instruments, so their use is riskier. Also, if you want to own the stock of an oil company, you need to buy that company's stock directly. But if you want exposure to the company but aren't really interested in owning a stock, an ETF that includes that company might be better.

Commodity trading strategies

Follow the trend

Although commodity markets can be volatile, taking a step back and looking at the price movement of a particular commodity over a long period of time can reveal trends.

This strategy involves first being able to identify the existence of a trend and then identifying the appropriate entry and exit points. You need to sure that you're seeing an uptrend or a downtrend, rather than just small swings within a specific range (i.e. between support and resistance levels). If the upper or lower limit is crossed repeatedly, it may be a sign that the market is trending up or down.

A key skill in trading is then to be able to enter the market at the start of the trend and exit before any trend reversal. For this, using fundamental analysis might be useful.

Breakout trading

This is a trading strategy where you need to be able to identify when the price of an asset will rise or fall beyond its support or resistance levels. You should open their position once the support or resistance level is crossed and then close their position as soon as the price stabilises or before it begins to reverse.

This is a short term strategy that works best in commodity trading when there is a strong trend (whether positive or negative) because by their very nature these markets must experience larger price movements at certain times to keep the asset on its price path.

Range trading

The price of an asset can, for a period of time, fluctuate within a price range (i.e. support and resistance levels). If you can identify when this is happening, you can sell the asset when the price is at the higher end of the range and buy when it hits the bottom end.

The problem is that it can be hard to tell for sure whether an asset is moving within a range or whether the price will move more significantly in a positive or negative trend. Additionally, if an asset is in overbought territory and close to the upper band of the range (i.e. the resistance level), the price may stay in that territory for some time, which can make hard to know when is the best time to enter the market.

Trading based on fundamental data

The commodity trading strategies described above involve technical analysis (and possibly quantitative skills), where you should carefully examine charts and charts in an attempt to correctly predict the path of an asset. However, you can also use fundamental analysis to predict the direction the price of an asset will take.

Fundamental analysis involves examining upcoming economic, political and social events, as well as general market news, in order to gain a real understanding of the forces that determine the price of the commodity in question. For example, let's say OPEC is likely to restrict the supply of oil. The basic laws of economics tell us this will likely drive up the price of crude oil, and those who invest in commodities (especially crude oil) will seek to profit from it. Also, pay attention to changes in the economic activity of large economies, like the Chinese economy, as these will often have a significant impact on the price of certain commodities.

The downside to this approach is that it may require a significant amount of time to get a steady flow of updated commodity trading information and to analyse the technical details behind it. It is also believed that the fundamentals of a commodity are already factored into its price anyway, and therefore it is unlikely that you can succeed in profiting from the analysis of fundamental data.

Trading hours

The opening hours of the commodity market depend on each commodity. However, most markets are open almost 24 hours a day between Sunday and Friday evening, with the majority of the major commodities markets being closed weekly on Saturdays. The times and days will likely be different if you invest in stocks, for example on the New York Stock Exchange, where the trading hours are from 9:30 a.m. to 16:00 Monday through Friday (if you want to invest in companies linked to the commodity markets).

Make sure to watch out for the public holidays of the commodity exchange in which you are investing. Brokers usually clearly state the trading times on their website. The New York Stock Exchange publishes a calendar that shows when the market is closed.

For the most part, whether you're in the UK or Mexico, commodity trading hours are more than sufficient.

Benefits of commodity trading

  • A broad range of financial products and instruments.
  • High volatility provides you with the opportunity to make profits.
  • Commodity trading hours tend to be longer than stock trading hours.

Drawbacks

  • Some financial instruments feature leverage, which results in increased risk (in addition to bigger gains).
  • Some technical and fundamental analyses are quite complex and may not be suitable for new traders.

A final word

Commodity trading offers traders huge opportunities to profit from price movements due to asset volatility. The range of financial products and instruments that are available caters to the needs of traders with different risk tolerance levels and preferences. However, some technical and fundamental analysis is required to profit from commodities rather than just playing the game, and it is important that you learn the basics first. Traders should take a look at educational materials and test the waters with commodity trading demo accounts (which simulate the trading activity of a real account).

Recommended brokers for the trading of commodity CFDs

BrokersRegulationTrading platformsOfficial website
FCA, ASIC, CySEC MetaTrader 4 + 5
Admiral Markets website
ASIC, CBFSAI, FRSA, B.V.I FSC, FSCA, FSA.JP MetaTrader 4 + 5
AvaOptions
AvaTrade website
FCA, ASIC, DFSAMetaTrader 4 + 5
cTrader
Pepperstone website
CySEC, ASIC, IFSCMetaTrader 4 + 5
XM website
FCA: United Kingdom, ASIC: Australia, CySEC: Cyprus, DFSA: Dubaï, FSA: Seychelles, FSA.JP: Japan, FSCA: South Africa, IFSC: Belize
CFD trading comes with a high risk of losing money, it is therefore not suitable for all investors. Between 74-89% of retail investor accounts lose money when trading CFDs.

FAQ

What is commodity trading all about?

Commodities can be traded on the stock markets using a variety of financial instruments. Although many people invest in commodities for trading purposes, traders are also looking to profit from ambient volatility.

Is commodity trading halal ou haram?

Islam prohibits the trading of futures contracts (which are common in commodity trading) because it is said to be haram. In contrast, transactions via the spot market are considered halal.

What is a commodity trading account?

Most reputable brokers offer trading accounts that include commodities (silver, soybeans, etc.). Some of these accounts may be commission-free, where you pay for the service through spreads and other fees.

What is the most common commodity that is traded?

The world's most traded commodity is crude oil, although there are many other types of oil. The two main ones are West Texas Intermediate (WTI) oil and Brent oil.

What is the role of forwards and futures contracts in commodity trading?

These types of contracts are very similar, although futures contracts tend to have standardised terms while the exact terms of forward contracts can vary. Both of these types of contracts can be used to trade commodities, either to speculate or to obtain price certainty.

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